The Fed Blog

Wednesday, February 22, 2017

The Recession Is Over

It’s easy to believe that the strength in the US economy since Election Day has a great deal to do with Trump’s surprising and stunning victory, including Republican majorities in both houses of Congress. His promises to cut taxes and reduce regulations seem to have revived animal spirits across the board among US consumers, small business owners, manufacturers, purchasing managers, and investors. I have been reporting on the incredible vertical ascents since the election in the Consumer Optimism Index, the Small Business Optimism Index, the average of the Fed districts’ composite business indicators, the M-PMI and NM-PMI, and the stock market. Also going vertical have been my Boom-Bust Barometer and my Weekly Leading Index.

It’s harder to imagine that Trump’s victory can explain the recent strength in global economic indicators. It’s possible that he revived animal spirits overseas on expectations that his fiscal policies might boost US economic growth, which should benefit the global economy. But his protectionist “America First” rhetoric, championing bringing jobs and manufacturing capacity back to the US, should squelch any optimism that better growth in the US will be shared with the rest of the world through the US trade deficit. Despite the media’s 24/7 focus on everything Trump, there may be a couple of other reasons why the global economy is showing signs of better growth:

(1) The energy recession is over. For starters, the 76% plunge in the price of a barrel of Brent crude oil from June 19, 2014 through January 20, 2016 triggered a global recession in the oil industry, which depressed other industrial commodity prices as well. The CRB raw industrials spot price index dropped 27% from April 24, 2014 through November 23, 2015. The price of oil and the CRB index have rebounded 102% and nearly 30% from their recent lows.

So the global energy industry’s recession is over, and it is no longer weighing on global economic growth. A good way to see this is to compare the y/y growth rates in S&P 500 revenues—which is a good indicator of global economic activity, since about half of those sales occur overseas—with and without the revenues of the Energy sector. With Energy, the growth rate turned negative from Q1-2015 through Q2-2016. It turned positive during Q3-2016. Excluding Energy, the growth rate remained positive over this same period, though it did weaken to a low of 0.2% during Q4-2015.

(2) China is back to its old tricks. China is also boosting economic growth by continuing to stimulate it with plenty of credit. During January, total “social financing” rose by a record $542.3 billion. That’s not on a y/y basis, but rather on a m/m basis! On a y/y basis, social financing totaled $2.7 trillion over the past 12 months through January. Bank loans, which are included in social financing, rose $335.7 billion during January m/m and $1.8 trillion over the past 12 months.

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ABOUT: Dr. Ed Yardeni is the President and Chief Investment Strategist of Yardeni Research, Inc., a provider of independent investment strategy and economics research. This blog highlights excerpts from our research service, which is designed for investment and business professionals.

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